In November 1690, soldiers and sailors returned from Canada defeated and demanding pay, but the government had nothing to give them. Taxes were raised to unprecedented levels to collect funds to pay them, but collecting taxes in a difficult winter, not only in coins but also in grains, would have taken a very long time. The soldiers and sailors became “mutinous,” and so in December 1690 the government resorted to issuing paper money. Those “bills of credit” are commonly known as the first American paper money (which is correct only if “American” refers to the area of the future United States; Dutch Brazil, Antigua, and Canada had already had paper money). But the real significance of the 1690 money was its unique legal status. Unlike all previous paper moneys in (greater) America, Europe, and China, it was not forced on all sellers under threat of penalty and there was no credible promise to convert it into precious metal coins or other valuable commodities. Its only legal support was the government’s commitment to accept it in tax payments (legal tender for taxes in modern terms). This is very similar to our modern currency (which is also legal tender for debts).
The reason for the invention was that England prohibited Massachusetts from creating money. Massachusetts was not among the few colonies whose charter permitted independent coinage. The royal coinage monopoly in England therefore implied that Massachusetts was not allowed to produce coins. However, in 1649 Parliament executed the king and abolished royalty. Therefore, in 1652 Massachusetts opened a mint and made its coins legal tender for debts and taxes. After the Restoration, in the late 1670s, the mint became the key symbolic flashpoint between king and colony and was viewed by English officials as treasonous. Eventually, the mint closed in 1682 and the colony’s charter was revoked in 1684. The issue resurfaced in 1689 as Hutchinson and Sewall helped Increase Mather negotiate with the new monarchs William and Mary about the charter’s renewal.
With such unpleasant recent history, and while still awaiting charter restoration, 1690 Massachusetts could not afford to create formal money, of whatever material. Therefore the colony only made “bills,” which happened to have small, round denominations convenient for shopping, and forced neither soldiers nor sellers to use them as money. Only tax collectors were forced to accept these bills. This was supposed to induce sellers (who were all also taxpayers) to voluntarily accept bills from soldiers.